Introduction to capital gains tax on divorce and separation
Capital Gains Tax (CGT) can arise on the sale or other disposal of an asset if the asset is sold (or in some cases, has a market value) that is higher than the original cost of the asset plus any enhancement expenditure and disposal costs. The current rates of CGT are 10%, to the extent that any income tax basic rate band is available, and then 20%. Higher rates of 18% and 28% apply for certain chargeable gains on residential properties with the exception of any element that qualifies for private residence relief.
If you are married or in a civil partnership, you can transfer assets from one to another without any CGT until you separate and then the transfer between one spouse and the other is only free from CGT for transfers that occur in the tax year in which the separation occurs, i.e., before the following 6 April. Capital gains tax divorce: separating and divorcing couples should therefore think carefully about and plan the split of their assets as early as possible and take legal and tax advice to minimise the tax cost of their separation and leave as much value as possible for to share between them.
What is the definition of separation from my spouse/civil partner for CGT purposes?
Spouses or civil partners will be treated as separate for GCT when:
- they are separated under an order of a Court,
- or they are separated by a formal Deed of Separation executed under seal (except in Scotland where the deed should be witnessed),
- or they are in fact separated in such circumstances that the separation is likely to be permanent.
The marriage or civil partnership should have broken down. If the marriage or civil partnership has not broken down but the couple does not reside in the same house they are still treated as living together for CGT purposes.
Do you pay CGT on divorce settlements?
A property can be transferred from one spouse to another free of any capital gains tax unless they are separated. If they have separated, then the capital gains tax exemption is available only until the end of the tax year in which they became
For the purpose of the capital gains tax exemption for married couples, they are treated as separated from each other if the separation is under a court order, a separation agreement or they are separated in such circumstances that the separation is likely to be permanent. Once the capital gains tax exemption for married couples is no longer available, transfers between the separated couple will be treated as made between connected persons until the decree is absolute and may therefore be deemed to take place at market value which may give rise to a liability to capital gains tax on the spouse disposing of the property, or a share in it (subject
to any available exemptions such as main residence relief). Transfers between the couple after the decree absolute will be taxed according to the actual sale proceeds received unless there is an element of undervaluing or an outright gift in which case they will be treated for CGT as made at market value and any gain taxed accordingly. Capital gains tax on a marital home in divorce should therefore be considered carefully.
How is divorce affected by Capital Gains Tax?
You can only transfer assets between you free of CGT until the end of the tax year in which you separate i.e., before 6 April. Transfers between you after the tax year of separation will normally be treated as gifts and therefore liable to CGT if the market
value is greater than the allowable base and other costs of the asset. Principal private residence relief may be available however if the asset is or was the matrimonial home.
When is CGT paid on a separation or divorce?
CGT can be payable if the transfer of a matrimonial asset is to a third party or if it is transferred to the other spouse after the tax year in which the couple separates. If the asset is the matrimonial home, then normally the transfer will be exempt from CGT.
CGT arising on a separation or divorce cannot be deferred. If the gain is on residential property and is not exempt, then for disposals on or after 27 October 2021 you need to report and pay the tax within 60 days of the disposal. For disposals of other property, the gain must be reported by 31 December in the year following the tax year in which the disposal occurred. Capital gains tax selling a house during divorce should therefore be considered carefully.
What if I am not a UK resident?
If you’re not resident in the UK you must report sales of UK property as a non-resident, even if you have no tax to pay.
What if the matrimonial home is sold?
If one spouse remains in a jointly owned home and the other moves out and later on the home is sold, the share of the sale proceeds belonging to the spouse who stayed will remain free of CGT as it was their main home. Any capital gain on the other spouse’s share may be liable to CGT, but if the home is sold within 9 months of them moving out, then the exemption from CGT for their main residence will apply to the period of absence but after that, a proportion of the spouse’s gain may be liable to CGT. However, relief is available where, in connection with a separation or divorce or dissolution of civil partnership, the leaving spouse or civil partner transfers their share of the jointly owned property to the remaining spouse or civil partner before the property is sold.
This relief is only available if the leaving spouse makes the transfer more than 9 months after leaving the property and:
(a) it continues to be the other spouse’s only or main residence;
(b) the transfer takes place under a Consent Order and a claim is submitted to HMRC within 2 years of the Order being made; and
(c) the leaving spouse has not elected a new “principal private residence” since leaving.
If these conditions are met, the leaving spouse or civil partner will still obtain private residence relief from CGT for the period from his or her moving out to the point of transfer.
What is a ‘no gain no loss’ treatment?
No gain/no loss disposals are disposals where the asset is treated as passing from the transferor to the transferee at a value which results in neither a gain nor a loss accruing to the transferor. For example, transfers between spouses or civil partners of in a year of assessment in which they are living together will be treated as taking place on a no gain/no loss basis and so the transferees will inherit the transferor’s CGT base cost of the asset
Jodi Tuson Stater Heelis Solicitors concludes;
Divorce has the potential to be amongst the most stressful life events a person might experience. Although some financial concerns (such as ensuring your immediate housing needs are met) will be at the forefront of your mind, the tax implications of any potential settlement or final court order are not always considered in as much detail as they should be – in some cases, they are regrettably not even considered at all.
Often, the tax with the most significant implications in divorce will be capital gains tax, however, there is all manner of potential tax implications (including the treatment of dividend income from family companies and trusts) which may result in unexpected consequences. Accordingly, it is absolutely vital to seek expert tax advice in any situation relating to the financial consequences of divorce, including during the preparation of any pre-or post-nuptial agreement
If you or your clients are facing a divorce or separation contact Patrick Cannon to ensure that the CGT and stamp duty exemptions on divorce, separation or dissolution of a civil partnership are fully taken into account and any relief is claimed. SDLT on divorce and the transfer of assets is explained here.